Help-to-Buy ISAs will end up feathering nests of the wealthy

Posted by Christian Hilber, SERC and LSE

George Osborne’s bid to boost home ownership in Britain might look like an effort to give young people a leg-up onto the housing ladder, but the evidence suggests they will be sorely disappointed. The Chancellor of the Exchequer’s budget unveiled a new “Help-to-Buy ISA” savings account which will subsidise deposits for first-time buyers while leaving untouched the fundamental flaws at the heart of our growing housing crisis.

The new ISA savings accounts will be available through banks and building societies from this autumn. In a nutshell, the government will add £50 to every £200 which savers manage to put away towards the deposit. First time buyers can make an initial deposit of up to £1,000 when opening the account. The total subsidy to first time buyers is capped at £3,000. It can be used by first time buyers to purchase homes priced up to £450,000 in London and £250,000 elsewhere.

The new policy is similar in spirit to the various predecessor Help-to-Buy schemes. The Help-to-Buy policy has been described by commentators as the biggest government intervention in the housing market since the Right-to-Buy scheme of the 1980s. But Help-to-Buy and, in particular, the new Help-to-Buy ISA are not a good idea. They are unlikely to help first time buyers achieve their dream of home ownership. 

Why it won’t work

The new ISA is intended to stimulate housing demand from first time buyers. This should translate – in theory at least – into new housing being supplied and higher home ownership.

However, evidence from the US suggests that there is only a very weak link at best between housing subsidies and improved home ownership levels. In fact, in tightly regulated housing markets in the US (where there is inflexible supply), the subsidies have a negative effect on home ownership because the price effect – through increased demand – more than offsets the income effect from the subsidy. In less regulated US markets (with flexible supply), subsidies do have a positive effect on home-ownership rates, but only for higher income groups.

The trouble, from the UK perspective, is that long standing evidence that I have recently considered in research with Wouter Vermeulen suggests that the UK has an extraordinarily inflexible planning system. This makes housing supply incredibly unresponsive to demand shocks and acts to push up house prices. This effect is most pronounced for London and the South East, where planning regulations are tightest. In other words, stimulation of demand by a Help-to-Buy ISA has the likely effect of driving up house prices, especially in London and the South East, while having no positive effect on construction or ownership.

A busted building boom

Consistent with this idea, according to Nationwide, house prices in London increased by 25.8% in the year following the announcement and subsequent implementation of the original Help-to-Buy scheme, from the second quarter of 2013 to the same period in 2014.

A residential building boom failed to emerge. To the contrary, housing construction is currently at record lows. According to statistics from the Department for Communities and Local Government, the UK built close to 380,000 new homes in the fiscal year of 1969/70 (when statistics began). Housing construction gradually declined towards a record low in 2012-13 of less than 135,510 new homes. In 2013-14 figures were slightly higher at 140,930 new homes, but this reflects the typical increase associated with an economic recovery rather than a building boom induced by Help-to-Buy. The UK homeownership rate has been in decline since the turn of the millennium, falling from 69% in 2001 to 64% in 2014.

With all likelihood the Help-to-Buy ISA scheme will have similar – if perhaps weaker – stimulating effects on housing demand and prices. The positive effect on house prices may be particularly pronounced in London and the south east and for starter homes. However, it is important to note that since starter homes, “trade-up” homes and private rental homes are all reasonably close substitutes, house prices and private rents are likely to increase across the spectrum.

No Spain, no gain

In fact research by François Ortalo-Magné and Sven Rady for both the UK and the US suggests that due to “trickle-up effects”, capital gains on starter homes incurred by credit-constrained owners can lead to a housing price overreaction, with prices of trade-up homes displaying the most volatility. As a consequence of all this, it is highly likely that first time buyers are no better off. In fact they may be worse off for two reasons. First, as tax payers they help finance the subsidies. Second, the increased prices of starter homes may mean that first time buyers can no longer reach the loan-to-income ratios recommended by the Bank of England and thus are priced out.

So who benefits from housing subsidies such as the Help-to-Buy ISA? Almost certainly it is not young first-time buyers, or even younger existing homeowners who will find trade-up homes for expanding families are further out of reach. Instead, because the subsidy likely increases house prices and private rents across the housing spectrum, the main winners may in fact be wealthy buy-to-let owners and older homeowners, especially those thinking about downsizing or moving to countries where housing is comparably affordable. In short, the policy may in fact subsidise wealthy owners of multiple or expensive properties and retirees who sell-up for a move to Spain.

Any political party that is serious about solving the British housing crisis should address the rout-cause of the problem, which is the broken British planning system. The proposed Help-to-Buy ISA not only is likely ineffective in raising home ownership, it also likely has undesirable redistributive effects, and, perhaps worst of all, worsens the ongoing housing affordability crisis.

 This post first appeared on The Conversation. Read it here.

LSE Works lecture: podcast and slides

Thanks to everyone who came along to Steve Gibbons' LSE Works lecture with Ruth Lupton and Tim Leunig on 22 January. For those who didn't make it - or who want the presentations - you can now get the podcast and slides here.

LSE Works lecture, 22 January

SERC Director Steve Gibbons is giving one of this year's LSEWorks lectures. He'll be talking on 'Neighbours, Peers and Educational Achievement', and discussing both his own research and work by others at the Centre.

He'll be joined by SERC affiliate Tim Leunig, Chief Analyst and Chief Scientific Adviser at the Department for Education, and Ruth Lupton, Professor of Education at the University of Manchester and Visiting Professor at CASE.

The event runs from 6:30-8pm at the Hong Kong Theatre, Clement House. It's free and open to all.

More details are here.

The Non-Met Commission

[Posted by Prof Henry G. Overman]

I've spent a lot of time over the last seven years (since SERC was founded) thinking about how urban economics can help improve urban policy. As part of that, I've helped specific cities and LEPs develop their evidence base and think about policy implementation (particularly Manchester, but also North East LEP, Birmingham, Great Cambridge / Greater Peterborough). I've also provided advice to BIS and Cabinet Office on the implementation of City Deals.

Recently, however, I've had an opportunity to move beyond this urban focus to think about the challenges facing the 'non-mets': the places outside our metropolitan areas that produce roughly half of England's GDP. The challenges these places face, and some of the potential solutions, are discussed in the interim report of the Independent Commission on Economic Growth and the Future of Public Services in Non-Metropolitan England (I'm one of the commissioners).

We're working on refining our recommendations over the next couple of months. As the report makes clear - there are some big questions still to answer - not least about how we might reform the relationship between central and (non-metropolitan) local government. I know that many people would like to see wholesale reform in this area. But there's also the possibility of an 'earned autonomy' model for non-mets that would parallel the process that has seen Manchester the first of the mets to be handed stronger powers (with Leeds, Sheffield and perhaps others to follow). I imagine many heated debates to come as we try to resolve this and a range of other crucial questions. Do get in touch with the commission [nonmet_commission@local.gov.uk] if you'd like to know how you can contribute to those discussions.
  

Building homes where we need them

Finally had a chance to catch-up with Centre for Cities report on where to build homes for Britain's most successful cities.

In the ten least affordable (British) cities building out every brownfield site delivers a total of 425,000 extra houses. If you go outside of their existing built-up area and use land within 25 minute walk of an existing train station you could add up to 1.4 million new homes (at reasonable densities). If neighbouring authorities could be made to cooperate that total rises to 3.4 million homes within 2 km of existing train stations.

The trouble, of course, is that those 3.4 million homes (within walking distance of existing infrastructure) would need to be built on green-belt land. In total, around 12.5% of the green belt land around those cities would be needed for development.

Achieving agreement on this scale of development on green belt land will clearly be difficult. Although, as the report notes, developing brownfield land can be a complex process and may require cities to take additional actions (e.g. land assembly) and investment (e.g. new infrastructure). And that brownfield land is only capable of delivering a fraction of the homes that could be built around existing infrastructure in the greenbelt.

In short, as the report makes clear, both options have their challenges, but making housing more affordable in our most successful cities will require a more sensible debate to designate land on its merits rather than according to whether it is currently designated as brown or green field.

Who buys new homes in London?

There's some interesting figures in this British Property Federation report from earlier this year on purchases of new homes in London (which I somehow missed first time round).

Headline figure is that various forms of investor acquire around 60% of new units with owner occupiers taking 40%. Around half of those investor purchases are by overseas buyers (defined as buyers who are normally registered as overseas). There's little evidence that those overseas buyers are leaving properties empty.

There are interesting variations across price ranges and locations - with owner occupiers acquiring around 80% of sub £450 per square foot properties (mostly in outer London) but only around 30% of £1,000-£1,500 per square foot properties (mostly in inner and 'prime' central London).

Overseas buyer activity varies by location as well - accounting for 50% of prime, 20% of inner London and only 7% of outer London (I think this is totals of investors and owner occupiers).

As always, figures from the property industry come with a big fat health warning (there's lots of private data and expert adjustments in use here) but I still found the overall numbers interesting - and a useful counter point to some of the media reporting which suggests much more overseas buyer activity.

Can 'Tech North' take off?

Posted by Dr Max Nathan, SERC and NIESR

Rory Cellan-Jones has a nice article on the BBC website on the prospects for the Government’s ‘Tech North’ initiative, building extensively from my work with Emma Vandore on Tech City in London. Here’s some further thoughts.

Tech North was launched by Nick Clegg last week: it’s one of the products of the DPM’s recent Northern Futures initiative. The idea is to promote tech clusters in Liverpool, Manchester, Sheffield, Leeds and Newcastle: Clegg has put £2m/year on the table to support local firms, and to attract FDI to the area.

Politically this is a no brainer. It meshes with the government’s ‘rebalancing’ rhetoric. And it fits the new mission of TechCity UK, which has expanded its remit from just East London to cover the whole country. TCUK is publishing work next month looking at digital clusters, which will put some new numbers behind the policy.

*

So will it work? Rory is fairly sceptical in his piece. I’m still unclear what the programme will actually do: so here are five issues policymakers should be thinking about.

1/ Real geographies – Tech North connects five big cities with over 150 miles between them. In the real world, urban tech is in very tight microclusters: neighbourhood scale scenes which allow for lots of face to face contact. In Liverpool, for example, a lot of the action is in Ropewalks or the Baltic Triangle.

In London, Ministers originally hoped to ‘connect’ the Shoreditch cluster to the Olympic Park a few miles away. That hasn’t proved possible, not least because Old Street firms didn’t want to move there and saw no connection between the two.

So the chances of creating a single super hub across the Pennines are slim at best. There are worrying echoes of the Thames Gateway here: a planning concept, not a real place. On the other hand, as we found in London, the area branding might prove a helpful way to raise the profile of these local scenes.

2/ Who’s in and who’s out? The DPM seems to have focused his attention on the five Northern core cities. Fair enough, in that these are the economic powerhouses of their wider regions. But the real geography of tech activity is a little different. But cities like York and Sunderland also have quite a lot of tech firms. So why aren’t they included?

3/ FDI versus growing our own – firms cluster because co-location makes sense: they can tap into new ideas and pools of skilled workers and can share useful inputs (like fast broadband or VC investors). On the other hand, as Henry Overman and I have argued, clusters have tensions built in. As more firms enter, pressures on space build up, so rents rise. And competition rises, for staff and for market share.

Given all this, it’s risky to base cluster development policies on foreign investment. If FDI simply brings in big multinationals, these might displace smaller, younger UK businesses. Even if this raises aggregate productivity, I doubt it's what Government or cities want in this case. Agencies like UKTI typically try and maximise the count and size of foreign investments. A different approach is needed here, which is to focus on the type of foreign inputs.

4/ Infrastructures – specifically FDI programmes should try and enrich the rest of the ecosystem, especially specialist services tech firms need: finance, lawyers, accountants and workspaces. This stuff is only just starting to appear in London at scale, and is likely to be a priority for other UK cities. Certainly, the UK’s VC scene has been pretty weak outside the capital.

Equally, fast internet (and fast connection to it) is a basic need. For me, this is now a public utility, so it’s disappointing that the Superconnected Cities scheme has retreated from rolling out faster systems to everyone, to simply providing vouchers to SMEs. The CORE programme in York, Peterborough and Derby is an interesting exception (thanks to Tom Forth for the link).

5/ Policy architecture (and whether it really matters) – cluster policy advocates like Michael Porter assume that cluster development has to be local, since clusters are local phenomena. But this doesn’t follow.

First, Tech North has little cash on the table: strikingly, its five-city budget is about the same as the original budget for East London.

Second, a lot of the relevant policy levers are held at national level: tax breaks for investors, crowdfunding regulation, immigration and skills. That still leaves some local levers: branding, networking, planning and any local investment pots. But it’s limited stuff.

Arguably some of these national levers should be devolved: that’s started to happen through City Deals and Local Growth Deals. But we’re at the very start of this process, and though the post-Scotland moment may yet shake things up further, what Ministers are handing over in powers they’re largely taking away in cuts.

But perhaps that’s too pessimistic. As Emma and I found in the East London research, the Old St scene grew quietly for years without policymakers really noticing. That could well be the likely trajectory for the many clusters under the Tech North umbrella.


Originally posted on the squareglasses blog.